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Earlier this year, the IRS issued denial letter 201224036 rejecting an application filed by a medical marijuana dispensary for exemption under section 501(c)(3). The interesting but ultimately not surprising aspect of the denial letter is that the IRS flatly held federal not state law controlled in determining the legality of the organization's activities for purposes of section 501(c)(3): "The fact that State legalized distribution of cannabis to a limited extent is not determinative because under federal law, distribution of cannabis is illegal." The IRS therefore concluded the organization furthered a substantial nonexempt purpose (the IRS also found prohibited private benefit because the group was organized as a cooperative with only members having access to the medical marijuana). This IRS position, combined with the fact that the IRS and, more recently, the Tax Court deny business expense deductions for taxable medical marijuana organizations under Internal Revenue Code section 280E, may spell the tax death of medical marijuana dispensaries.

According to a document posted by the Medical Cannabis Resource Center in Oregon, it is the subject of this denial letter. The letter suggests the group may try to limit its activities in ways that push right up against the legality envelope but do not cross into (IRS) forbidden territory.